Oil States International, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company provides engineered products and services through Offshore/Manufactured Products, Downhole Technologies and Well Site Services, with demand substantially tied to oil and gas industry activity and customer spending.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $140.5 million | $134.8 million | $411.8 million | $500.7 million |
| Operating loss | $16.1 million | $30.8 million | $53.5 million | $506.0 million |
| Net loss | $13.0 million | $20.0 million | $44.1 million | $449.6 million |
| Diluted loss per share | $0.22 | $0.33 | $0.73 | $7.52 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $20.6 million | $131.1 million |
Q3 revenue rose 4% year over year, led by service revenue growth of 13%; product revenue declined 3%. Revenue for the first nine months fell 18%, reflecting reduced activity and project-driven demand compared with the prior-year period. Operating loss narrowed in both comparisons; the 2020 nine-month result included $406.1 million of goodwill impairment and other substantial asset impairments. Q3 2021 operating loss included $2.1 million of inventory impairment and $0.7 million of restructuring charges.
Cost of revenues excluding depreciation and amortization was $117.2 million in Q3, implying a 16.6% gross margin, compared with $120.6 million and 10.5% a year earlier. The nine-month comparable margin was 18.1% versus 10.9%; prior-year impairments materially affect comparability. The filing does not report a separate adjusted or normalized margin measure.
Cash, debt and liquidity
- Cash and equivalents were $67.6 million at September 30, 2021, versus $72.0 million at December 31, 2020.
- Total debt was $178.7 million, including $135.0 million principal of 2026 convertible notes, $26.0 million principal of 2023 notes, and other debt. Approximate debt net of cash was $111.1 million.
- The company had no ABL borrowings and $61.4 million available to draw, after $16.5 million of letters of credit. It reported covenant compliance. The $125 million asset-based facility matures in February 2025, subject to a springing maturity provision.
- Nine-month operating cash flow was $20.6 million; capital expenditures were $11.0 million. Cash used in investing activities was $5.3 million and cash used in financing activities was $19.4 million.
- Management expects approximately $15 million of 2021 capital expenditures and stated that cash, operating cash flow and ABL availability should meet liquidity needs over the next 12 months.
Segments and material changes
- Offshore/Manufactured Products: Q3 revenue decreased 12% to $69.0 million; operating income was $1.8 million. Backlog was $249 million, with Q3 bookings of $106 million and a 1.5x book-to-bill ratio.
- Downhole Technologies: Q3 revenue increased 36% to $25.5 million; operating loss improved to $5.0 million, including the $2.1 million inventory impairment.
- Well Site Services: Q3 revenue increased 23% to $46.0 million; operating loss improved to $5.3 million. Higher land activity supported growth, while Hurricane Ida disrupted Gulf of Mexico operations.
- For the nine-month period, Offshore/Manufactured Products revenue fell 22%, Downhole Technologies revenue rose 4%, and Well Site Services revenue fell 21% versus 2020.
- During 2021 the company issued $135 million of 4.75% convertible notes due 2026 and used proceeds in part to repurchase $125 million principal of 1.50% notes due 2023. At September 30, $26 million principal remained on the 2023 notes.
Outlook, risks and unusual items
- Management described activity as recovering from 2020 lows but continued to cite uncertainty around crude oil demand, customer investment, ESG-related pressures, COVID-19 and supply-chain disruption. The filing gives no formal earnings or revenue guidance.
- Hurricane Ida reduced estimated Q3 revenue by $5.9 million and operating income by $3.0 million. Facilities sustained no major direct damage, but power restoration, closures and workforce challenges disrupted operations.
- The company recognized $8.8 million of payroll tax expense reductions over the first nine months under the CARES Act employee retention credit program. 2021 also included $5.6 million of asset impairment charges and $6.7 million of severance and restructuring costs.
- Risks include commodity-price and activity cyclicality, customer capital discipline, inflation and inability to pass on cost increases, tariffs and supply availability, climate and environmental regulation, foreign-exchange movements, and future impairment risk.
- A dispute with the GEODynamics seller concerns indemnification claims, a $17.5 million promissory note carrying value and the seller’s claim to approximately $19 million of CARES Act tax carrybacks. The seller’s motion for partial summary judgment was dismissed in September 2021; the company intends to defend the lawsuit. Management believes other pending claims will not materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether the operating recovery and higher short-cycle activity translate into sustained positive operating cash flow, given the $20.6 million generated in the first nine months.
- Whether Offshore/Manufactured Products backlog converts to revenue on schedule; the company reported $249 million of segment backlog and $153.2 million of longer-duration contract backlog, with about 21% of the latter expected to be recognized in the remainder of 2021.
- Available borrowing capacity and covenant headroom under the borrowing-base facility, particularly if receivables or inventory weaken.
- Resolution and ultimate financial impact of the GEODynamics seller litigation and indemnification dispute.
- Effects of commodity prices, customer spending, COVID-19, supply-chain costs and regulatory changes on demand, margins and impairment assessments.